The Fifth Avenue branch of the New York Public Library is to undergo a $300m restructuring process. Photograph: Paul Brown / Rex Features

Major literary names including Salman Rushdie, Art Spiegelman and Mario Vargas Llosa are protesting the planned $300m restructuring of the iconic Fifth Avenue branch of the New York Public Library, saying it is "a misplaced use of funds in a time of great scarcity".

A letter signed by more than 700 writers, academics and others was sent to the library yesterday, criticising plans to add a collection of books for lending to the reference library currently housed on Fifth Avenue and 42nd Street. The proposal includes moving the collections from two other branches to Fifth Avenue, adding more computers, more space and potentially a cafe. Up to three million books could also be removed from the library to a storage facility.

"NYPL will lose its standing as a premier research institution (second only to the Library of Congress in the US) – a destination for international as well as American scholars – and become a busy social centre where focused research is no longer the primary goal," say the signatories, who also include Jonathan Lethem. "One of the claims made about the [plan] is that it will 'democratise' the NYPL, but that seems to be a misunderstanding of what that word means. The NYPL is already among the most democratic institutions of its kind. Anyone can use it; no credentials are needed to gain entry. More space, more computers, a cafe, and a lending library will not improve an already democratic institution."

Others disagree: an editorial in the New York Times called the plans "both necessary and forward-thinking in this digital era", and said that "though some library lovers want nothing to change, this plan could revitalise the library and make it as much a resource for the public as it is a research haven for writers and scholars".

Designed by the architect Norman Foster, the renovation of the building on 42nd Street is scheduled to begin in 2013, with the reopening estimated to take place in 2017-8. Officials say the new library, which would be open until 11pm, will be visited by "millions more users", and that this "enlivened, democratic hub of learning and creativity would be a symbol of rebirth".

New York Public Library President Anthony Marx said his "absolute priority" was "to preserve the integrity of the library and its collections, as well as the unparalleled quality of the services we offer" in a piece for the Huffington Post.

"For the first time in more than three decades, the 42nd Street library will house a major browsable circulating collection in addition to its superb research collections. The formula is simple: more readers, plus all the books, materials, and services they need, will infuse the building with even more intellectual and creative vitality," he wrote. "Some have shared concerns that this will compromise our commitment to research. We believe instead that the circulating library will complement and reinforce research, bringing even more readers into the building who will be able to more easily explore the unique research-level collections. Researchers, in turn, will be able to take advantage of the circulating collection."